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Senior Finances: The Pension ‘Advance’ Scheme

“We ended up paying more in interest with our pension advance then we would have paid if we simply paid off the interest over time on our existing debt load.”

by Dave Riley

OKAY, I KNOW THIS HAS BEEN quoted to death, but I’m going to use it anyway. When asked why he robbed banks, the infamous Willie Sutton is reported to have said, “Because that’s where the money is.”

These days, certain characters in the loan industry know where the money is — in the bank accounts of retirees who have guaranteed pensions. And like Mr. Sutton, some of them are finding ways to get at that money.

For example, say you’re a senior with a regular monthly pension payout, but not a whole lot in the bank. All of a sudden you need a whopping amount of money for a major medical expense or some other reason. Or maybe you don’t really need it, but you want it. Possibly you’d like to buy an RV or even a yacht. Well there are companies that will advance you money against your pension. These companies tend to target retired military and government employees because their pensions come with a rock solid guarantee.

I first wrote about this in 2013 when my blog was under the aegis of a different organization. At the time, Jessica Silver-Greenberg, a New York Times financial reporter with a penchant for sticking up for consumers, had begun delving into these loans. Ms. Silver-Greenberg, a 2004 graduate of Princeton University, has an impressive resume. She was a Pulitzer Prize finalist for national reporting in 2112, and had a series of page-one bylines for her extensive coverage of the ongoing shareholder saga at JPMorgan Chase. In the past she has covered all kinds of debt stories, including lending practices, debt collection, student loans, credit cards, and mortgages. Currently she and Times colleague Michael Corkery are reporting on laws that prevent consumers from using class action suits against corporations and forcing them into arbitration.

MUCH OF HER REPORTING is about retirees getting the short end of the stick when it comes to finances. With her, sticking up for seniors is personal. “I am very close to my 88-year-old grandmother, Ruth Silver,” she told me in an email. “She is my inspiration for many things.”

In an early story about pension advances, she wrote, “The Times’s review of more than two dozen loan contracts found that the loans, once fees were factored in, could come with effective interest rates from 27 to 106 percent — critical information that was not disclosed either in the ads or the contracts.”

She wrote about Ronald Govan, a retired marine from Snellville, Georgia. Mr. Govan had a military disability pension of $1,033 a month. A company offered him an advance of $10,000 in return for five years of monthly payments of $353 from his pension. According to both the New York Times and my Quicken loan calculator, that works out to an effective interest rate of 36% — a really bad deal at a time when you can get a mortgage for about three percent and when your CDs earn just a smidgen above one percent. And by the way, lending against military pensions like Mr. Govan’s is illegal, but the companies doing so claim they are making “advances,” not loans.

I don’t want to give Ms. Silver-Greenberg too much credit, but if the timing I saw is correct, a number of people in government took quick notice of these practices after the Times began publishing her stories. (Apparently the old post hoc, ergo propter hoc idea isn’t always a fallacy.)

About ten days after Ms. Silver-Greenberg’s seminal story, New York Governor Andrew Cuomo announced an investigation into pension loan companies.

“These companies are literally harvesting the hard earned pensions of seniors, military veterans and other hard working New Yorkers,” said Governor Cuomo in a statement on his web site. “Using deceptive practices to cheat people out of their pensions by enrolling them in backdoor high-interest loans will not be tolerated in our state.”

Benjamin Lawsky, the state’s Superintendent of Financial Services, echoed his sentiments. “These pension advances appear to be nothing more than payday loans in sheep’s clothing,” he said.

Massachusetts wasn’t far behind. Secretary of the Commonwealth William Galvin announced his state was taking action. “It’s a novel industry and it seems to be flourishing,” Mr. Galvin told the online site Investment News. “I understand the pressure someone may have to sell [their pension],” he added, “and we’re not saying it’s never appropriate [but] obviously you’re going to get less than the value of future payments.”

Attorneys general in several states aren’t buying the argument that the payouts are advances and not loans, and are going after the companies. New York issued subpoenas for ten of them, the ads for several of which popped up on my screen when I Googled “pension advances.” Three are located in California, including two here in my home county of Orange. Others are in Indiana, Florida, Delaware, Michigan and Arkansas.

In Maine, Pine Tree Legal Assistance, a nonprofit that provides free legal help to people with low incomes, got involved. On its web site it published a list of five signs of predatory loans and cautioned people that “if you receive a small pension, a modest Social Security disability or retirement benefit or SSI, or any other form of modest retirement income, you may be a target.”

Some progress — but not much — is being made in protecting people from pension loans.

In 2014, Missouri banned such loans for public sector employees. A new law in Vermont classifies pension advances as loans and requires pension lenders to apply for a license.

In D.C. this past September, the Senate Special Committee of Aging, chaired by Maine Senator Susan Collins, held a hearing at which testimony painted a negative picture of pension loan practices.

One of those testifying, Dr. Louis Kroot, retired USN Commander, said he and his wife Kathie signed for a pension loan when they faced a huge and unexpected series of debts after he left the service. They realized too late that, in his words, “we had been taken to the cleaners… We ended up paying more in interest with our pension advance then we would have paid if we simply paid off the interest over time on our existing debt load.”

CONSUMER WATCHDOGS generally urge that people steer clear of these loans. “Just don’t do it,” one said bluntly. But if you have a real emergency need for cash, see a legitimate financial counselor for advice before you commit. If in the end you decide to get one of these “advances,” do the following:

Don’t take the sales pitches as gospel. What counts is what’s on paper, not what a salesperson told you. If you don’t understand the paperwork, take it to someone who does — a lawyer, an accountant, a financial advisor at your senior center.

Make sure the interest and all other fees are spelled out specifically.

If a loan officer presents you with paperwork, but tells you that you have to sign on the spot and can’t take it with you to look over, get up and leave — immediately.

As for Ruth Silver, she didn’t wait for government or anyone else to warn other potential victims. After my original blog was posted, Ms. Silver-Greenberg told me that her grandmother had printed it out and showed it to the other seniors with whom she shared her days at the 92nd Street Y in Manhattan.

Way to go, Grandmother Silver!

Cartoon reprinted by permission of T/Maker ClickArt. Further reproduction not permitted.

About Dave Riley

Growing Old Isn’t For Sissies is about aging. It’s stories of how some older people achieve remarkable successes, how some people make the lives of others better, and how all seniors have hurdles to face — maladies, loss of loved ones and more.

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Dave Riley

Growing Old Isn’t For Sissies is about aging. It’s stories of how some older people achieve remarkable successes, how some people make the lives of others better, and how all seniors have hurdles to face — maladies, loss of loved ones and more.